For the iShares MSCI USA Momentum Factor ETF, 2024 is a bumper year.

The stock market has performed strongly this year, and the iShares MSCI USA Momentum Factor ETF has performed even better. Data shows that the fund's return rate reached 40% in 2024, far exceeding the S&P 500 index's 27% increase. Various signs indicate that this ETF may continue to rise in 2025.

The strong performance of the S&P 500 index this year is attributed to robust economic growth and ongoing excitement around new technologies like artificial intelligence. However, this iShares momentum ETF's return rate is even better, with a strategy focused on betting on stocks that have performed strongly in recent times.

According to a report from the independent research firm DataTrek on Tuesday, this outperformance may continue into 2025.

"The U.S. economy remains robust, and the Federal Reserve is leaning towards rate cuts. We believe that the fundamental drivers of these markets will not change much in the coming months," the firm wrote in the report.

Looking back at the rolling one-year performance since 2014, this momentum ETF has averaged 1.2 percentage points higher than the S&P 500 index each year, despite experiencing periods of underperformance. DataTrek notes that the fund performs best in what is termed a 'typical mid-cycle market'—that is, periods when investors have confidence in the direction of the Federal Reserve and the economy.

In contrast, this ETF performed poorly in 2021 and 2022. DataTrek co-founder Nick Colas stated that investors were concerned that the Federal Reserve's rate hikes would make it difficult for large tech stocks to maintain high valuations. However, the market's concerns proved to be unnecessary—since the launch of ChatGPT in November 2022, excitement surrounding artificial intelligence has ignited market enthusiasm.

"Thanks to ChatGPT, it's like rocket fuel," Colas said in an interview.

Technology stocks still play an important role in the iShares MSCI USA Momentum Factor ETF, but their weight is not as high as one might think. Nvidia (NVDA.O) and Broadcom (AVGO.O) are the fund's major holdings, accounting for a combined 10% of the fund's portfolio. However, stocks like JPMorgan (JPM.N), Walmart (WMT.N), and Costco (COST.O) also have significant weights. According to data from the iShares official website, the financial sector is the largest industry in the fund, accounting for 24%, slightly higher than the information technology sector.

Of course, bull markets cannot last indefinitely, and stock valuations are at a high level. Currently, the price-to-earnings ratio of this momentum ETF is 23 times, significantly up from 14 times two years ago, and higher than the S&P 500's level of 22 times (FactSet data).

However, Colas points out that there are currently no signs indicating that the market will face a correction in the coming months. Economic growth remains robust, and the Federal Reserve is gradually easing monetary policy. Although there is debate among investors about the extent of the Federal Reserve's rate cuts next year, it is generally believed that interest rates will decline. Wall Street's 'fear index', the Cboe Volatility Index (VIX), rose above 23 before the election on November 5 but has recently fallen back to 15, below its long-term average of around 19.

Article reposted from: Jin Shi Data